France's Pernod in Talks to Buy UK's Allied Domecq

France's Pernod Ricard (search), the world's third-largest spirits group, is in talks to buy bigger rival Allied Domecq (search), the two firms said on Tuesday, sending shares in the UK group 19 percent higher.

Pernod, which owns Chivas Regal (search) scotch and Jacob's Creek (search) wine, said it had teamed up with U.S. conglomerate Fortune Brands (FOB) for a potential deal, confirming months of market and media speculation.

Analysts said Allied, whose brands include Ballantine's whisky, Beefeater gin and Malibu coconut rum, could fetch around 7.2 billion pounds ($13.5 billion), or 650 pence a share, and would help Pernod close the gap on market leader Diageo.

"Discussions with Allied Domecq Plc are at an early stage, and there can be no certainty that an offer for Allied Domecq Plc will ultimately be forthcoming," Pernod said in a brief statement, echoing an earlier announcement from Allied.

A source familiar with the situation said a deal was "a measure of weeks, not months" away.

Pernod almost bid for Allied in 1999, and the two firms' portfolios are complementary in terms of geography and brands, with the biggest overlap in Spain.

Allied's performance has been transformed since 1999, and some analysts have doubted Pernod's ability to raise the money to buy its larger rival.

But the French firm has been rapidly cutting its debt and has a track record of working together with other companies to make a successful bid.

Pernod joined forces with Diageo to carve up the Seagrams drinks portfolio in 2001, and analysts have been looking for its next move since it lost out on the chance to buy Scottish whisky maker Glenmorangie to LVMH last year.

"Pernod has a very good track record with Seagrams, so it will be very difficult to bet that they cannot make it work," said Nikolaas Faes, an analyst at Exane BNP Paribas in London.

"A bid of 650 pence would be earnings-enhancing from the first year," he said, adding he did not expect any other bidders to surface.

People familiar with the situation said Pernod would look to break up Allied, filling in gaps in its own portfolio by taking Allied's major vodka brand, Stolichnaya, and avoiding overlaps that might concern competition regulators.

One said Pernod's aim was to get a deal recommended by Allied's board by the end of the month but cautioned it was a complicated process, which could yet fall apart.

"The bear in the room is the fact you have the partnership, for antitrust and financing reasons," with two rivals joining forces, the person said, adding that Allied's pension deficit could also be a stumbling block.

Pernod would lead the transaction and transfer some of the assets to Fortune Brands after the deal is completed, the person said, adding that Fortune would buy multiple billions of pounds worth of brands.

Fortune, the owner of Jim Beam bourbon, has long been rumored to be looking for an acquisition to beef up its spirits presence in Europe. The U.S. conglomerate also makes products ranging from Moen faucets to Titleist golf balls.

"They have agreed in principle, but until they get inside the company (Allied) and do the work, it doesn't mean anything," the person said.

Another source close to the process said Allied Chief Executive Philip Bowman would leave once a deal was completed.

The cost of credit protection on Allied soared as investors fretted over the implications for Allied's $4.2 billion of bond debt.

Allied is rated investment-grade BBB+ by Standard & Poor's (search), while Pernod does not have a rating, raising the possibility that Allied's rating may be lowered after any merger is completed.

Five-year credit default swaps on Allied traded 25 basis points higher bid at 68 basis points, traders said. That means it cost an annual 68,000 euros to insure 10 million euros of Allied debt against default.

$1=.5334 Pound